Common Tax Dispute Issues

Voluntary Disclosure Program

Second Chance

The Income Tax Act provides that a taxpayer may avail himself or herself of penalties for improperly reporting income if the taxpayer voluntarily discloses the error. The Act provides relief for penalties that arise from the error, but does not provide for relief of taxes from the error.

There are certain conditions that must be met for a voluntary disclosure to be accepted:

The disclosure must be made voluntarily (before CRA takes action to require compliance);

There must be penalties associated with the error;

The error must be at least one year overdue; and

The information provided must be complete (cannot be a partial disclosure).

The Income Tax Act only provides for relief from penalties for the period that is ten years before the filing of the application.

After a voluntary disclosure application is made, the taxpayer is expected to remain compliant. The CRA will not accept a voluntary disclosure from the same taxpayer for the same matter.

If you have not been contacted by the Canada Revenue Agency (CRA) regarding your unreported income, contact us today to begin your voluntary disclosure process to minimize your financial penalties.

Directors’ Liability for Corporate Tax

Canadian tax legislation provides that directors may be liable for certain tax amounts that were unremitted by their corporation to tax authorities. It is worth noting that working with a tax professional can make a huge positive impact on getting the person off the hook for directors’ liability.

Circumstances of Directors’ Liability

Often, people are put at directors of a company by a simple mistake of the accountant or lawyer. In rare circumstances a spouse may be on the hook without their knowledge. For instance, a husband who is facing credit issues may list their wife as the director of the company. If the partners break up, and the husband stops paying the company’s taxes, the CRA will go after the wife.

De Facto Directors

The CRA may find individuals to be de facto directors and be liable as directors even when they are not officially registered as directors of a company. An individual will be considered a de facto director when that individual has responsibilities similar to a director and represents himself or herself as a director to others.

Due Diligence & Two-Year Limitation Period

The Income Tax Act and Excise Tax Act state that where a director exercised the “degree of care, diligence and skill that a reasonably prudent person would have in similar circumstances”, then the director will not be liable.

The CRA is required to commence an action under these provisions within two years of the date a person ceased to be a director. Further, it is recommended that directors avoid acting as de facto directors after resigning.

If you have been reassessed for Director Liability, our Tax Litigation Lawyers can assist persons going through the Notice of Objection stages. contact our tax litigation lawyers to begin your process

Income Tax Act & Excise Tax Act

The Income Tax Act provides for liability of directors in subsection 227.1(1) of the Act:

A director may be liable for the amount that ought to have been withheld on payments such as salary, wages, certain benefits, and payments out of certain plans, and payments to a non-resident that would be subject to withholding requirements.

Similarly, subsection 323(1) of the Excise Tax Act also provides for liability on directors:

Directors are liable for GST/HST collected by the company but not remitted, and net GST/HST refunds to which the company is not entitled.

The Canadian Scientific Research and Experimental DevelopmentTax Incentive Program (SR&ED) encourages research and development by offering support to businesses that conduct scientific research or experimental development in Canada. The SR&ED tax incentive program allows businesses to deduct SR&ED expenditures from their income and also provides SR&ED Investment Tax Credit (ITC) to reduce Part 1 tax.

Subsection 248(1) of the Income Tax Act (the “Act”) provides for the definition of SR&ED. In Northwest Hydraulic Consultants Ltd. v. Canada[1], the Tax Court of Canada interpreted the provisions of the Act and found a five step approach to determine if an activity is SR&ED:

Was there a technical risk or uncertainty – an uncertainty that could not be removed by techniques, procedures and data that are generally accessible to competent professionals in the field?

Was a hypothesis formulated for the purpose of reducing or eliminating that technological uncertainty?

Were the procedures used consistent with established and objective principles of scientific method, including trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?

Did the process result in a scientific or a technological advancement?

Was there a detailed record of the hypotheses, tests and results kept as the work progresses.

The Canada Revenue Agency has since adopted the test provided for by the Tax Court[2].

There are further conditions for SR&ED credits even if the above test is satisfied. Other conditions include, but are not limited to: the expenditures must all or substantially all be for SR&ED, the activity must be performed in Canada, and the activity must not be for commercial production.

If there are concerns regarding the SR&ED being claimed that is not resolved with discussions with the SR&ED staff at the CRA, then you should ask for an Administrative Second Review so that the Assistant Director of the SR&ED program or a person assigned by the Assistant Director will reconsider your case.

If the decision is maintained after the Administrative Second Review, then a Notice of Assessment will be issued. If you disagree with the decision, then a Notice of Objection must be filed within 90 days.

Our Tax Litigation Lawyers can assist persons going through the Administrative Second Review as well as the Notice of Objection stages. contact our tax litigation lawyers to begin your process

Foreign Property

You must report to the CRA through the form T1135 (Foreign Income Verification Statement) if you have at any time in the year foreign assets (“specified foreign property”) that amounts to more than C$100,000 (in adjusted cost base).

What constitutes a specified foreign property is defined in subsection 233.3(1) of the Income Tax Act:

“specified foreign property” of a person or partnership means any property of the person or the partnership that is

(a) funds or intangible property, or for civil law incorporeal property, situated, deposited or held outside Canada,

(e) an interest in a partnership that owns or holds specified foreign property,

(f) an interest in, or right with respect to, an entity that is non-resident,

(g) indebtedness owed by a non-resident person,

(h) an interest in, or for civil law a right in, or a right — under a contract in equity or otherwise either immediately or in the future and either absolutely or contingently — to, any property (other than any property owned by a corporation or trust that is not the person) that is specified foreign property, and

(i) property that, under the terms or conditions thereof or any agreement relating thereto, is convertible into, is exchangeable for or confers a right to acquire, property that is specified foreign property,

but does not include

(j) property that is used or held exclusively in the course of carrying on an active business of the person or partnership (determined as if the person or partnership were a corporation resident in Canada),

(k) a share of the capital stock or indebtedness of a non-resident corporation that is a foreign affiliate of the person or partnership for the purpose of section 233.4,

(l) an interest in, or indebtedness of, a non-resident trust that is a foreign affiliate of the person or partnership for the purpose of section 233.4,

(m) an interest in a non-resident trust that was not acquired for consideration by either the person or partnership or a person related to the person or partnership,

(n) an interest in a trust described in paragraph (a) or (b) of the definition “exempt trust” in subsection 233.2(1),

(o) an interest in a partnership that is a specified Canadian entity,

(o.1) a right with respect to, or indebtedness of, an authorized foreign bank that is issued by, and payable or otherwise enforceable at, a branch in Canada of the bank,

(p) personal-use property of the person or partnership, and

(q) an interest in, or for civil law a right in, or a right to acquire, a property that is described in any of paragraphs (j) to (p).

The Government of Canada is active in identifying and pursuing those who hide their assets outside of Canada. The taxpayers should be aware that not disclosing foreign assets could lead to legal consequences. Form T1135 should be filed if it is applicable to you. When in doubt, you should contact a tax professional for legal advice.

The dispute process with the CRA and the Tax Court of Canada can become complicated and could be costly if it is not prepared and carried out correctly. Our leading Tax Litigation Lawyers have extensive experience dealing with this matter and can help solve your tax issues.

Employee vs. Independent Cotnractor

There is an inherent conflict of interest between employers and the CRA. For an employer, classifying a worker as an independent contractor can minimize its obligations such as EI and CPP payroll contributions. On the other hand, CRA wants a worker to be classified as an employee since there is a higher chance that taxes will be paid since the employer will be required to make source deductions.

It is in the best interest of both the employer and workers to know how the classification works. This classification is determined based on not a single factor but many. Some of these factors are: the degree of control the employer has over its worker and whether the worker is provided with tools and equipment by the employer.

Taking the factors into consideration, you should review whether your worker does indeed fit into the classification that you want. If you have independent contractors, the CRA might assess you by classifying your worker as an employee. Click here for more information on Employee vs Independent Contractor.

IF YOU THINK YOUR WORKER HAS BEEN WRONGFULLY CLASSIFIED AS AN EMPLOYEE, CONTACT US TODAY TO START THE DISPUTE RESOLUTION PROCESS.

Real Estate (House Flipping)

Real Estate – House Flipping Tax Implications

With the increase in housing prices, people look for opportunities to flip houses. The plan is simple – buy an old house, fix it up, sell it for a profit, and then repeat. What fuels this activity is the assumption that because of the Principal Residence Exemption (PRE), you will not be subjected to tax when you sell that house. Another plan is to buy a house, sit on it until the price increases, and then to sell it for a profit.

But you need to be aware that the CRA is constantly on the lookout for these types of activity. There are three possible outcomes to flipping houses: (1) the proceeds are tax-free under the PRE and none of the proceeds are taxable; (2) the proceeds get taxed as capital gains and only 50% of the proceeds are taxable; or (3) the proceeds get taxed as business income and 100% of the proceeds are taxable.

There are different factors that are taken into consideration in determining what sort of tax treatment the proceeds of the sale will receive. Some of the factors include: the length of the period of ownership and the frequency of similar transactions made. The intention or motive at the time of acquisition of the house is important too. If you are contemplating a sale of your house but you are uncertain as to what sort of tax treatment it will receive, contact a tax professional for advice. Click here for more information on PRE.

IF THE PROCEEDS FROM THE SALE OF YOUR HOUSE HAVE BEEN TAXED MORE THAN YOU THINK, WE MIGHT BE ABLE TO HELP YOU. CONTACT OUR LAWYERS TODAY TO START THE DISPUTE RESOLUTION PROCESS.

Networth Assessment

Net-worth Assessment

Net-worth assessment is one of the methods used by the CRA to go after taxpayers. When an individual is targeted, the CRA assumes that the taxpayer has failed to disclose certain amounts on their reported income. It can start with the CRA requesting that you provide them with financial records such as bank and credit card statements.

Anyone can be targeted but obvious targets are individuals who drive luxury cars and live in expensive houses well beyond their means while not having the reported income to back them up. However, ordinary cash businesses (such as restaurants) and individuals who are owner-manager are often targeted as well.

Essentially, the CRA does an analysis of an individual’s net worth. They calculate and compare an individual’s net worth over a period of time while taking factors such as reasonable living expenses into consideration. Then, the CRA can reassess the taxpayer for the discrepancies in the net worth and the reported income.

Because the CRA does not have complete information, their assessment can be inaccurate. It is up to the taxpayer to show that the CRA has made an error in their calculation. Therefore, it is crucial and a good practice to maintain your financial records in an accessible and well-organized manner.

IF YOU HAVE BEEN SUBJECTED TO A NET WORTH ASSESSMENT, CONTACT US TODAY TO START THE DISPUTE RESOLUTION PROCESS.

Bankruptcy

Bankruptcy

If you are having difficulty paying the tax debt, you may want to consider negotiating the payment terms with the CRA. For instance, if you can’t pay the entire balance owing, you might be able to enter into an agreement with the CRA to make smaller payment over time until you pay all the outstanding debt. Also, you may be able to obtain relief.

Ultimately, if you have taxes owing, the CRA can take actions to recover the debts. For example, the CRA can garnish your wages or put liens on your property just like other creditors. If you declare bankruptcy, your tax debts may be discharged subject to certain conditions such as you fulfilling your duties under the Bankruptcy and Insolvency Act. However, not all your tax debts might get automatically discharged upon bankruptcy.

You can’t declare bankruptcy to deal specifically with your tax debt only. If you declare bankruptcy to avoid paying the tax debt, the CRA may challenge your bankruptcy in court. As such, declaring bankruptcy should be used as a last resort.

Arbitrary Assessment

The CRA can issue arbitrary assessments, also known as involuntary CRA tax assessment, if you have failed to file your tax returns on time. What this essentially means is that the CRA will file the tax returns for you based on their estimate of your income and issue you an assessment. The amount on that assessment will often be higher than if you had filed your tax returns on time, leaving you with a tax bill that is higher than originally anticipated.

If you have been arbitrarily assessed, you need to contact a tax professional right away. Also, to challenge the CRA’s assessment, it is crucial that you file the missing tax returns in a timely manner. If you fail to act in time, you are deemed to have agreed to the assessment amount and are required to pay the taxes that comes with it (Section 152(8) of the ITA).

IF YOU HAVE BEEN SUBJECTED TO AN ARBITRARY ASSESSMENT, CONTACT US TODAY TO START THE DISPUTE RESOLUTION PROCESS.

False Statements or Omissions Penalty

False Statements or Omissions Penalty

There are many penalties that can be imposed on the taxpayer. One of the penalties that you should be aware of is the false statements or omissions penalty.

As the name suggests, the CRA under section 163(2) of the ITA can impose penalties on taxpayers for making false statements or omissions. There are two elements under which you can be given the penalty: (1) if you knowingly make false statements or omissions; or (2) if your actions amount to gross negligence with respect to false statements or omissions. Unlike other penalties where a taxpayer will be found liable for failure to act, the CRA must prove on the balance of probabilities that the taxpayer’s actions constituted one of the two elements. The penalty is the greater of either: $100 or 50% of the understated tax and/or overstated credits related to the false statement or omission.

Luckily, there are defences available to taxpayers. One of these defences is the reliance on professional advice. For example, if relied on your accountant and he/she made false statements or omissions, you might get off the hook. However, the CRA might still argue that you knew of what your accountant was doing or that you were grossly negligent in failing to notice the mistakes made by your accountant.

If you did or think you committed one of the two elements, you shouldn’t wait until the CRA founds out and comes after you. Under the Voluntary Disclosure Program, if you come clean on what you did before the CRA takes any audit actions against you, the penalties may be waived.

Click here to for more information on the CRA Voluntary Disclosure Program.

Taxpayer Relief Provisions

There are four categories under which the Minister may cancel or waive the penalty or interest. The CRA describes them in detail: extraordinary circumstances; actions of the Canada Revenue Agency; inability to pay or financial hardship; and other circumstances.

Extraordinary circumstances

As the title suggests, relief is granted if there are situations beyond the taxpayer’s control such as natural disasters that prevented the taxpayer from filing on time or meeting his or her tax obligations.

Other examples include: emotional distress caused by death in the family, fire, and other accidents.

Actions of the Canada Revenue Agency

Sometimes, the CRA makes an error when providing information to the taxpayer or there are delays in processing your file such that those delays lead to the taxpayer not being informed of the amount he or she was owing. In situations like these, the CRA may cancel or waive the penalty or interest.

Another example is unreasonable delays in completing the audit process.

Inability to pay or financial hardship

Generally, the CRA does not grant relief under this category unless there are exceptional circumstances beyond just the inability to pay or financial hardship. The CRA considers many factors before granting such relief. For instance, the CRA may grant the taxpayer a relief if a payment of interest or penalty would prevent access to basic necessities such as food. As for a business, the CRA may grant a relief if a payment of interest or penalty to jeopardize the financial stability of the business leading to loss of employment for its employees.

Another example is financial hardship brought on by loss of employment.

In any case, taxpayers seeking a relief under this category should be prepared to provide the CRA with financial statements to show that they are experiencing financial hardship.

Other circumstances

The CRA may grant relief for circumstances other than those described in the first three categories.

Business Expenses

Business expenses

One of the perks of operating a business is the ability to deduct expenses associated with running the business. While not all expenses are deductible, there are some business expenses you may be able to deduct such as:

Business start-up costs

Legal, accounting, and other professional fees

Meals and entertainment (up to a certain portion)

Office expenses

Salaries, wages, and benefits

In addition, you should know the difference between current and capital expenses. Generally, current expenses are 100% deductible whereas capital expenses are deductible up to the Capital Cost Allowance. Click here for more information on the difference between the two.

You should review what can be claimed as business expenses to avoid discrepancies in your tax returns which can be the subject of a review or an audit. Click here for more information on business expenses.

If you have disputes with the CRA concerning business expenses, contact us today to start the tax dispute resolution process.

Did you receive a Notice of Audit from the CRA?

What you need to know about audits

AUDIT PROCESS

What happens during an audit?

There are two ways the auditor can conduct their audit:

On-site audit and/or

CRA office audit.

An on-site audit involves an auditor visiting your place of business. They will show you their identification and start the audit.

An office audit involves the taxpayer visiting the auditor at his or her office or sending the requested documents to the auditor. It is crucial that you follow the auditor’s instructions and provide the requested documents in a timely manner.

Example of the documents that may be examined: invoices, contracts, bank statements (that of both the taxpayer and the taxpayer’s family), and previously filed tax returns.

Our Tax Litigation Lawyers can REPRESENT YOU TO ENSURE THAT THE AUDITORS STAY WITHIN THEIR BOUNDARIES AND ONLY OBTAIN INFORMATION TO WHICH THEY ARE ENTITLED.

What happens at the end of the audit?

Once the audit has been completed, one of three things will occur:

the assessment was correct and no adjustments will be made;

an adjustment resulting in more tax owing will be made and you are required to pay the balance owing (reassessment); or

an adjustment resulting in less tax owing will be made and the CRA will owe you a refund (reassessment)

If the auditor finds that your return has to be reassessed (either you owe more taxes or you are entitled to a refund), you will receive a proposal letter and you will have 30 days to respond.

My Responsibilities

During an audit process, your responsibilities as a business owner include:

meeting registration, reporting, filing, and payment obligations under the laws that the CRA administers;

keeping your books and records up to date and in an accessible and readable format either on paper or electronically; and

providing your books, records, and supporting documents to the auditor upon request

Generally, you have to keep your books and records for 6 years from the day you file your tax return. Within those 6 years, the CRA may ask to see your books and records to verify the items on your return such as reported income or taxable supplies and expenses or input tax credits

My Rights

While most of the rights are straight forward, the following are worth highlighting.

4. You have the right to a formal review and a subsequent appeal.

This refers to taxpayer’s right to object to the CRA’s assessment and reassessment (through a Notice of Objection) and to bring an appeal to the Tax Court of Canada (through a Notice of Appeal).

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.

This refers to taxpayer’s right to complaint to the CRA for service-related issues. These issues include, but are not limited to, staff behaviour, undue delays, and misleading information.

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.

This refers to the taxpayer relief provisions available to taxpayers. Under certain circumstances such as natural disasters or death, the CRA may waive or cancel all or part of the penalties and interest.

Given these rights as a taxpayer, if you feel that any of your rights have been violated, you can launch a formal complaint against the CRA without the fear of being blacklisted. These rights are important and knowing them could strengthen your case.

Contact Our Tax Litigation Lawyers

Our offices are located in the vibrant Byward Market and directly in front of the Royal Canadian Mint

The dispute process with the CRA and the Tax Court of Canada can become complicated and could be costly if it is not prepared and carried out correctly. Our leading Tax Litigation Lawyershave extensive experience dealing with this matter and can help solve your tax issues.

Did you receive a Notice of Re-Assessment from the CRA?

What you need to know about audits

WHAT IS A REASSESSMENT?

Tax Reassessments

If the CRA believes additional tax should be payable, it will issue a Notice of Reassessment with the amount of tax due.

Often Notices of Reassessment are accompanied by the CRA’s reasoning for the reassessment. It is recommended that you review the basis of the reassessment with a tax professional, to determine if there is any merit to the CRA’s decision.

It is strongly recommended that you consult a tax dispute lawyer to assist with the preparation of Notice of Objection or to prepare one for you.

If you disagree with the CRA’s decision, then you should act quickly. The deadline to file a Notice of Objection is 90 days from the mailing of the Notice of Reassessment (not the date you receive it). It is possible in some circumstances to request an extension of up to one year after the 90 day period, but you should explain why you were unable to file the Notice of Objection within the 90 day period.

Contact Our Tax Litigation Lawyers

Our offices are located in the vibrant Byward Market and directly in front of the Royal Canadian Mint

The dispute process with the CRA and the Tax Court of Canada can become complicated and could be costly if it is not prepared and carried out correctly. Our leading Tax Litigation Lawyershave extensive experience dealing with this matter and can help solve your tax issues.

Appeal with the Tax Court of Canada

PREPARING A NOTICE OF OBJECTION

The most common form of appeal is a Notice of Objection.

If you disagree with the CRA’s decision, then you should act quickly. The deadline to file a Notice of Objection is 90 days from the mailing of the Notice of Reassessment (not the date you receive it).

It is strongly recommended that you consult a tax dispute lawyer to assist with the preparation of Notice of Objection or to prepare one for you.

Preparing a Notice of Objection

The Notice of Objection should set out the facts, reasons and, if possible, law to support your position that the CRA’s decision was incorrect. You should consult a tax professional to assist with the preparation of Notice of Objection or to prepare one for you.

The Notice of Objection will be reviewed by the Appeals Division of the CRA. It can take up to a year for an Appeals Officer to be assigned to review your Notice of Objection. The Appeals Officer will often send a letter informing you that he or she has been assigned to your file and for you to provide any further information you may have within a specified time.

The Appeals Officer may vacate, change, or confirm the reassessment of your income. If you disagree with Appeals Officer’s decision, then you should retain a lawyer to file a Notice of Appeal with the Tax Court of Canada within 90 days of the CRA’s decision.

Tax Court of Canada Procedure (TCC)

There are two procedural ways in which a taxpayer can bring a dispute before the Tax Court of Canada: informal procedure or general procedure. The Tax Court of Canada explains these procedures in detail.

Informal Procedure

Informal procedure is available to minimize the legal steps for disputes involving a smaller amount.

First, for income tax disputes, the appeal is limited to $25,000 or less. For GST/HST disputes, the limit is $50,000. If the taxpayer wishes to bring an appeal for amounts greater than those limits, they may proceed under the general procedure. However, if the matter involves amounts greater than the limits imposed under informal procedure, the taxpayer can still elect to limit the appeal to $25,000 for income tax or $50,000 for GST/HST disputes in order to proceed under informal procedure.

The taxpayer can represent himself or herself or can be represented by a lawyer or an agent (such as an accountant). The first step in the informal appeal process is to submit 3 copies (one original and two copies) of the Notice of Appeal (Informal Procedure) to the TCC office.

Once the Notice of Appeal has been filed, the Registry at the TCC office will send a letter of acknowledgement to the taxpayer and forward the copy of Notice of Appeal to the CRA. They will reply within 60 days and the taxpayer or his or her agent/lawyer will receive the copy of the reply.

General Procedure

Under the general procedure, the legal steps are more formal and the taxpayer may represent himself or herself or be represented by a lawyer.

As for a corporation, they must be represented by a lawyer unless the Court allows an officer of the corporation to represent it.

The first step in the appeal process is to submit 3 copies (one original and two copies) of the Notice of Appeal to the Registry at the TCC office. There is a filing fee that varies depending on the amount in dispute.

Once the Notice of Appeal is filed at the TCC office, they will forward a copy to the CRA’s representative, Justice Canada. They must reply to the Notice of Appeal within 60 days. When Justice Canada replies, a copy will be forwarded to the taxpayer or the lawyer and an answer may be given within 30 days of receiving that reply.

Discovery
After you provide an answer to the reply or 30-day time limit has passed, there will be an exchange of the documents which the parties will be relying on at the hearing. This exchange is usually followed by examinations for discovery. At this stage, the appellant (taxpayer) and respondent (the CRA/Justice Canada) examine the documents in order to discover what they might be able to use in the case. They may also examine witnesses for information.

Settlement
The settlement discussions often follow the close of discoveries. If there is no settlement, an application to schedule a hearing will be made by one or both of the parties. Before the hearing, the parties will attend what is known as pre-hearing conferences. The parties get the chance to bring their argument before a judge who will not be presiding over the actual hearing. The pre-hearing conferences allow the parties to gauge the strength of their case and consider possible settlement before the hearing. If no settlement is reached, the parties will proceed with the hearing where a judge will make a decision.

Decision
The judge will make one of the four decisions: dismiss the appeal; allow the appeal and vacate the assessment; allow the appeal and vary the assessment; or refer the assessment back to the CRA for reconsideration and reassessment.

FEDERAL COURT OF APPEAL

Can you appeal the Tax Court of Canada’s decision?

Most disputes get resolved after the TCC’s decision. However, if you disagree with the TCC’s decision, an appeal can be made to the Federal Court of Appeal. The Federal Courts Act states that the taxpayer may file an appeal if the Tax Court of Canada:

(a) acted without jurisdiction, acted beyond its jurisdiction or refused to exercise its jurisdiction;

(b) failed to observe a principle of natural justice, procedural fairness or other procedure that it was required by law to observe;

(c) erred in law in making a decision or an order, whether or not the error appears on the face of the record;

(d) based its decision or order on an erroneous finding of fact that it made in a perverse or capricious manner or without regard for the material before it;

(e) acted, or failed to act, by reason of fraud or perjured evidence; or

(f) acted in any other way that was contrary to law.

Burden of Proof

Burden of Proof – who has to prove the case against you?

You do. When the taxpayer appeals to the Tax Court of Canada, the burden of proof lies on the taxpayer to establish that the factual findings upon which the Minister based the assessment were wrong. In other words, you will need to collect and present evidence in order to disprovethe CRA’s position. This is alarming as average Canadian taxpayers are not tax law experts. What’s more, self-representation in litigation is extremely difficult at any level of court.

IF YOU INTEND TO PURSUE A TAX APPEAL AGAINST THE CRA, OUR TAX LITIGATION LAWYERS CAN REPRESENT YOU TO FIGHT YOUR CASE. contact us today

Contact Tax Litigation Lawyers

Contact Our Tax Litigation Lawyers

Our offices are located in the vibrant Byward Market and directly in front of the Royal Canadian Mint

The dispute process with the CRA and the Tax Court of Canada can become complicated and could be costly if it is not prepared and carried out correctly. Our leading Tax Litigation Lawyershave extensive experience dealing with this matter and can help solve your tax issues.

Collections & Compliance

PENALTIES

Penalties

The penalties the CRA can impose on individuals include: interest; late-filing penalty; repeated failure to report income penalty; and false statements or omissions penalty; and failure to provide foreign-based information. (Read about CRA Interests)

The CRA will charge 5% on the balance owing and additional 1% on the balance owing for each month the return is late (to a maximum of 12 months).

If the taxpayer had previously failed to file on time within 3 years prior, the penalty becomes more serious. The CRA will charge 10% on the balance owing and additional 2% per month (to a maximum of 20 months).

Again, the CRA might waive or cancel this penalty and any interest under the taxpayer relief provisions if you could not have filed your returns because of circumstances beyond your control. (Read about Tax Relief Provision).

Repeated failure to report income penalty

If you failed to report an amount on your return for the previous year and also failed to report an amount in any of the 3 years prior to the previous tax year, then the federal and provincial/territorial repeated failure to report income penalty might be imposed on you.

These penalties are each 10% of the amount that you failed to report on your return for the previous year.

If you make a false statement or omission on your tax return knowingly or under gross negligence, you may have to pay a penalty that is the greater of either: $100 or 50% of the understated tax and/or overstated credits related to the false statement or omission.

If you fail to provide the information regarding your foreign assets such as those required in the Foreign Income Verification Statement (T1135), you may have to pay $500 per month (to a maximum of 24 months) from the date you filed your returns.

Penalties related to tax return – Businesses/Corporations

Although there are many penalties the CRA can impose on businesses, in this subsection, we will discuss the most common penalties. They are: failure to file penalties; not reporting income; and false statements or omissions.

Failure to file penalties

The CRA will apply a 5% penalty on the amount of unpaid tax that is due on the filing deadline if the corporation files its return late. In addition, the CRA will impose a 1% penalty on the unpaid tax for each complete month that the return is late (up to 12 months maximum).

The penalty is greater if the corporation was issued a demand to file the return and was assessed a failure to file the return in any of the three previous years. Under this circumstance, the CRA will impose a 10% penalty on the amount of unpaid tax that was due on the filing deadline and additional 2% penalty on the unpaid tax for each complete month that the return is late (up to 20 months maximum).

Not reporting income

The CRA will apply a 10% penalty on the amount of unreported income if a corporation does not report an amount of income on its return for a tax year and in any of the three previous years.

False statements or omissions

If a corporation makes a false statement or omission on its tax return knowingly or by gross negligence, it may have to pay a penalty that is the greater of: $100 or 50% of the understated tax.

INTEREST

Interests

If you have any tax amounts owing, the CRA will charge daily compounded interest on them. The interest rate is set every three months. Although the interest rate charged is lower than the interest on credit card balances, it can still be significant. For instance, for April 1, 2016 to June 30, 2016, the interest rate on unpaid taxes is 5%.

In addition, the CRA will charge interest on any unpaid penalties. This means that if you file your returns late, you may have to pay the late filing penalty and the interest on that penalty.

CRA Payment Arrangements

If you are unable to pay the tax owing, there might still be hope for you. When it is determined that the taxpayer cannot pay the tax debt, the CRA might enter into an agreement with the taxpayer so that the debt can be paid in full through installments of smaller payments. If you have outstanding balance, you should still file your tax returns to avoid any penalties associated with late filing. There could still be interest associated with the outstanding balances.

However, this doesn’t mean the arrangements are available under any circumstances. The taxpayer should first make reasonable efforts to rearrange their financial situation to pay the debt in full. Also, the taxpayer should be prepared to show their inability to pay by providing the CRA with relevant financial information.

In any case, if you have any amount owing, you need to deal with it promptly. If not, the CRA can start legal proceedings against you to recover the amount.

TAXPAYER RELIEF

Taxpayer Relief Provisions

There are four categories under which the Minister may cancel or waive the penalty or interest. The CRA describes them in detail: extraordinary circumstances; actions of the Canada Revenue Agency; inability to pay or financial hardship; and other circumstances.

Extraordinary circumstances

As the title suggests, relief is granted if there are situations beyond the taxpayer’s control such as natural disasters that prevented the taxpayer from filing on time or meeting his or her tax obligations.

Other examples include: emotional distress caused by death in the family, fire, and other accidents.

Actions of the Canada Revenue Agency

Sometimes, the CRA makes an error when providing information to the taxpayer or there are delays in processing your file such that those delays lead to the taxpayer not being informed of the amount he or she was owing. In situations like these, the CRA may cancel or waive the penalty or interest.

Another example is unreasonable delays in completing the audit process.

Inability to pay or financial hardship

Generally, the CRA does not grant relief under this category unless there are exceptional circumstances beyond just the inability to pay or financial hardship. The CRA considers many factors before granting such relief. For instance, the CRA may grant the taxpayer a relief if a payment of interest or penalty would prevent access to basic necessities such as food. As for a business, the CRA may grant a relief if a payment of interest or penalty to jeopardize the financial stability of the business leading to loss of employment for its employees.

Another example is financial hardship brought on by loss of employment.

In any case, taxpayers seeking a relief under this category should be prepared to provide the CRA with financial statements to show that they are experiencing financial hardship.

Other circumstances

The CRA may grant relief for circumstances other than those described in the first three categories.

IF YOU ARE EXPERIENCING FINANCIAL HARDSHIP, OUR TAX LITIGATION LAWYERS CAN HELP YOU REDUCE OR ELIMINATE INTERESTS AND PENALTIES, EXTEND FILING DEADLINES AND REPRESENT YOU TO ACHIEVE A FAVOURABLE OUTCOME. CONTACT US TODAY.

Voluntary Disclosure

Second Chance (CRA Voluntary Disclosure Program)

The Income Tax Act (the “Act”) provides that a taxpayer may avail himself or herself of penalties for improperly reporting income if the taxpayer voluntarily discloses the error. The Act provides relief for penalties that arise from the error, but does not provide for relief of taxes from the error.

There are certain conditions that must be met for a voluntary disclosure to be accepted:

The disclosure must be made voluntarily (before CRA takes action to require compliance);

There must be penalties associated with the error;

The error must be at least one year overdue; and

The information provided must be complete (cannot be a partial disclosure).

The Income Tax Act only provides for relief from penalties for the period that is ten years before the filing of the application.

After a voluntary disclosure application is made, the taxpayer is expected to remain compliant. The CRA will not accept a voluntary disclosure from the same taxpayer for the same matter.

If you have not been contacted by the Canada Revenue Agency (CRA) regarding your unreported income, contact us today to begin your voluntary disclosure process to minimize your financial penalties.

Contact Our Tax Litigation Lawyers

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The dispute process with the CRA and the Tax Court of Canada can become complicated and could be costly if it is not prepared and carried out correctly. Our leading Tax Litigation Lawyershave extensive experience dealing with this matter and can help solve your tax issues.

Contact our Tax Litigation Lawyers

Our offices are located in the vibrant Byward Market and directly in front of the Royal Canadian Mint

The content of this website is provided for informational purposes only and should not be construed as legal advice. No action with regards to your particular matter should be taken until you have first sought full legal or professional advice from a lawyer fully retained to act on your behalf.

HazloLaw – Business Lawyers is a leading boutique business law firm based in Ottawa, Ontario. Our business lawyers practice exclusively in Business, Tax, and International Law. This allows us to focus our collective experience and knowledge to deliver exceptional service to our clients. For more information on our Firm, please visit www.HazloLaw.com

On a daily basis, Dean works closely with accountants at each step of the tax dispute process and uses his technical skills and creative, out-of-the-box thinking to resolve disputes as favourably as possible for the taxpayer and, whenever possible, to stop tax problems before they arise. This means looking at all ways of resolving a potential or live tax problem and using all of the tools available to tax professionals.

Jonathan M. Charron, LL.M. (Tax), LL.L., LL.B.

Tax Lawyer

Jonathan is a tax lawyer who focuses his practice on tax administration, cross-border transactions, corporate reorganization, and tax and estate planning for individuals, including the establishment of family trusts dealing inter alia with inter-jurisdictional matters, estate freezes, life insurance planning, philanthropic tax planning, shareholders agreement and the general administration of trusts and estates in the provinces of Québec and Ontario. Jonathan also structures professional corporations and provides tax planning for professionals and their families.